LDI Market Breaches £1trn As Smaller Schemes Join Hedging Trend

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Pension schemes hedged an additional £59bn (€69bn) of liabilities last year, taking the liability-driven investment (LDI) market to over £1trn, according to XPS Pensions Group.

Simeon Willis, chief investment officer at XPS Investment, the group’s investment consulting arm, said: “The pensions mass market has overcome its initial reservations and LDI is now a £1trn market.

“This is a great achievement for fund managers, advisers and trustees, who are now firmly taking control of their schemes’ futures, not leaving it to chance.”

Reporting on its latest annual LDI survey, XPS said broadly all of last year’s growth – up 6% from £965bn in 2017 – could be attributed to new mandates, which increased by 12%, or 265.

The vast majority of new mandates came from smaller defined benefit (DB) pension schemes, according to XPS. It attributed this in part to the growth of investment platforms and fiduciary management.

Directly accessed pooled funds were the single biggest contributor to the growth in mandate numbers, according to the consultancy. It said that 92% of the new mandates in 2018 were from pooled solutions, up from 87% in 2017.

Tim Miller, consultant at XPS, said: “73% of all LDI mandates are now in pooled LDI solutions, highlighting the efforts made by managers and advisers to bring accessible LDI solutions to all schemes.”

Total hedged liabilities by manager

XPS LDI survey notional liabilities hedged chart

Source: XPS Investment. *LGIM did not participate in XPS’ survey in 2018 and 2017. LGIM data is sourced from the KPMG LDI Survey 2017 and assumed to remain constant in 2017 and 2018.

The consultancy estimated that over half (54%) of UK pension schemes’ liabilities were now hedged with LDI. This was based on estimating that the UK private sector had a total DB pension scheme liability of around £1.9trn and discount rates of gilts plus 0.5% per annum.

However, it also said the actual level of hedging was probably higher as the 54% excluded hedging achieved through holding bond assets outside a specific LDI hedging programme.

BlackRock, Insight Investment, and Legal & General Investment Management (LGIM) continued to dominate the LDI market, with XPS’ survey estimating they managed 87% of LDI assets.

BMO Global Asset Management added 93 new mandates in 2018 and now had the largest number of mandates, although the manager was still fourth largest by the notional value of liabilities hedged, according to XPS.

The consultancy noted that Insight Investment had “also made some significant additions over the year”. It had taken on 30 new mandates to hedge an additional £67bn of notional liabilities.